GE Capital – risk-averse in China

GE Capital is the group's huge financial services arm, and perhaps the most aggressive of its divisions around the world. GE Capital accounts for more than 40 per cent of GE's revenues and, under Jeff Immelt, its structuring and operations have been changed to give investors more clarity on its finances.

From 1995, the division has been on an expansion path around the world. "GE Capital's instinct has always been to expand when there is blood on the streets," said one of its managers, referring to some of the group's best deals, done when the economy was in difficulty. Across the Asia region, it pumped in more than US$1bn into countries such as India, Thailand and especially Japan. In Asia, GE Capital has estimated assets of US$40bn.

But in China, its strategy was different. It entered the market back in 1983, at a time when each and every deal had to be vetted by head office back in the US. In the words of Dennis Nayden, president of GE Capital in 2000: "Our strategy in Asia in the 1990s [was] to gear up enough of a local presence to understand what was happening in these markets, and then wait and see how things would evolve."

The division's main focus in China so far has been in the area of leasing aircraft and aircraft engines. GE has a very close relationship with aircraft companies such as Boeing and Airbus through its aircraft engine business. David Wang, who headed GE's business in China for much of the 1990s, now heads Boeing's business in China.

This business took off in the early 1990s, when the state airline monopoly split into several regional carriers, all of which faced intense pressure to build up their fleets. Because these airlines had little start-up capital, but great cash flows because of stateregulated prices, their only option to acquire aircraft was through leasing. Enter GE Capital, which saw the area as an asset backed, relatively low-risk business.

Today, of GE's US$2bn in assets in China, almost US$1.2bn is in aircraft. GE Capital is the market leader, with a 40 per cent market share in aircraft leasing.

In the area of consumer finance, GE Capital became the first company to receive a finance licence in 1998, following a process that took five years to complete. It then opened a joint venture in Guangzhou with a local bank, in which it owned 97.5 per cent.

However, within a year GE scaled back its consumer finance operations in China: "It had been almost impossible to create enough of a market for GE's consumer lending business in Guangzhou," said Stephen Hatjun, who at the time was head of GE Consumer Capital.

GE also made a foray into the equipmentservicing business in Shanghai, with about 40 pieces of construction equipment available for hire. This joint venture did not work because there was very little credit history available for other organisations or individual borrowers, and customers were unwilling to pay high rates for the perceived risk that they represented.

The group is also believed to have had some exposure in the collapse of Guangdong International Trading and Investment Co (Gitic) in 1999. However over the next few years, as China's financial services, leasing and insurance industries liberalise and grow, GE Capital expects to grow significantly.

Last month, GE said it was preparing to offer a variety of loan products in advance of the opening up of China's financial markets by the end of 2006. These include diverse areas such as vehicle financing, reinsurance and mortgage loans.

GE Plastics – solid manufacturing

GE Plastics entered China quite early, with its first plant being set up in Guangdong in 1994. A second plant was established in Shanghai five years later. These plants supply a wide range of plastics to light industri

al and electronics export manufacturers in the Pearl River Delta and the greater Shanghai area. In the last three years, GE has invested US$30m in Shanghai, setting up compounding facilities in Nansha and Pudong, as well as a customer innovation centre. It caters to tightly focused business markets, and the products are either directly exported or sold to electronics exporting companies.

The division's production capacity increased by 50 per cent in 2002 to stand at an estimated 100,000 tons, while its annual revenues are about US$500m. It wants to achieve revenues of US$1bn by 2005.

China is perhaps the most crucial market in the world for GE Plastics and it has recently moved its Asia headquarters to Shanghai. It will also open a global research centre in Shanghai in 2003, to develop new products and applications for the whole of the Asia- Pacific region.

In 2002, GE Plastics spent US$25m to acquire a polycarbonate maker in Zhongshan city, Guangdong province, called Zhongshan Plastech Sunsheet Co. It wants to use Zhongshan to quickly ramp up production to meet surging demand in China.

In a related area of specialty chemicals called silicones, GE has a joint venture with Toshiba – GE Toshiba Silicones – which has become one of the world's major silicone producers. This joint venture, set up 30 years ago, has moved into China in a big way. GE's global market share in silicones is estimated to be around 20 per cent. In July 2001, it started production at a plant in the Shanghai zone of Waigaoqiao. This plant will supply a wide range of silicone products, including silicone rubber, sealants, oils, emulsions, resins and other specialty chemicals. Customers are drawn from a variety of industries such as textiles and electrical and electronic appliances.

In November 2002, GE Toshiba Silicones set up a joint venture in Shenzhen to make silicone elastomer products, primarily for customers in China. The company, called Shenzhen GETOS Fine Silicones, is a joint venture with Shenzhen Guanghua.

GE sourcing from China

GE has started using China as a global export base. All its businesses, including GE Lighting, GE Plastics, GE Medical and GE Appliances, buy millions of dollars-worth of products from GE and joint ventures in China for global markets. The company wants to increase its total procurement from China to US$5bn by 2005. A notable success has been

the export of refrigerators made by Frestech of China to the US market.

In addition to its major businesses, almost all other GE divisions have tried to set up ventures in China. In an extension of the aircraft and engine leasing business, GE has a joint venture engine services business in Xiamen, Fujian province. In 2001, China Eastern Airlines became a 30 per cent shareholder in the venture, which overhauls and repairs engines produced by GE Aircraft Engines and related companies. China Eastern has the largest fleet of GE CFM56 aircraft engines in China, and has entered into a service agreement with GE Aircraft Services Xiamen.

GE has also been quietly buying aircraft parts in China, from suppliers including Xian Aero Engine Corporation. It has already bought US$18m-worth of products from Xian, and would like to increase this significantly over the next few years.

GE Aircraft Engines has been named a major engine supplier to China's ARJ21 regional jet programme, which sees a potential of 500 aircraft over the next 20 years. Such a programme could yield total revenues of US$3bn.

GE Power has been a supplier to power projects in China for a long time. There are around 160 GE technology gas turbines in the country. In 2000, GE Power was awarded a contract to supply two gas turbines and technical services to a power station in Shenzhen. In July 2002 it won a US$35m contract for gas turbines in Nanjing.

At the end of last year, it entered into a US$14m joint venture with Shenyang Blower Works to provide repair and maintenance services. This was GE Power's first direct investment in China, although it was followed by another last month when it acquired a majority holding in a leading joint venture supplier of hydropower equipment. For an undisclosed amount it took a 90 per cent stake in Kvaerner Hangfa, which was set up in 1995 with registered capital of US$25m.

In the area of automation and controls, GE has also been making some initial moves into the market. In 1999, it signed a US$5.5m contract to build a central monitoring control system for the second phase of the Shanghai sewage project.

In June 2001, it established a joint venture automation engineering company in Chongqing, called Chongqing Tonghua Automation Engineering Co, gaining a foothold in southwestern China. The venture will supply advanced automation control systems to Chongqing's sewage, communications, water supply and other industrial customers, and will design and develop automatic control systems.

In recent months, GE has also taken some steps in the area of software. In November 2002, it set up a global development centre (GDC) at Dalian Haihui Technology Development Co. Established in 1996, Dalian Haihui will provide original design manufacturing services to GE's offices around the world. The company has strengths in transportation solutions, and has clients in Japan. GE looked at more than 100 other companies before selecting Dalian Huihai. It has eight other GDCs across the world, but this is its first in China.

Future direction

GE today has a business that has critical mass in China, and in Jeff Immelt a CEO who is willing to support and fuel its growth. Its presence in markets such as medical and plastics is particularly strong.

GE's experience reinforces some of the success factors for businesses in China:

the rules of business investment and return on investment apply, even in China;

investors need to understand the market and customer requirements, and figure out how to meet their needs better than anyone else;

plan ahead, but start small, and do not be afraid to pull out when things go wrong;

transfer a strong culture to the local operation, build a strong local team and invest heavily in management development and training;

use China as a manufacturing base to supply the local market and export overseas. This allows firms to earn foreign exchange, as well as build products and systems for global markets.

GE looks set for further expansion. A number of other GE businesses, such as the media and television business CNBC, do not yet have a presence in China. The group wants to ride the country's future anticipated growth and take advantage of major events on the horizon, such as the 2008 Olympics in Beijing and the 2010 Shanghai World Expo. "China's hosting of the 2008 Olympics… is going to show the world that China is a far cleaner place to do business than a lot of people imagine," says Immelt. "It's a hard-nosed commercial culture, and GE likes it.

"The Chinese economy is going to experience the fastest growth on earth and you can either ignore it or go with it. We are looking at major investments there."

Big chains plan further expansion

Marriott International said it planned to add six more mainland China properties in the next two years, reported South China Morning Post. Three will open in Shanghai, two in Dalian and one in Wuhan.

Six Continents, which operates the Holiday Inn and Inter-Continental chains, announced plans to add another six hotels to the 39 it currently runs in China.

Sheraton opens luxury resort The luxury Sheraton Sanya Resort, situated on the beachfront of Hainan's Yalong Bay, has opened for business. The resort is managed by Starwood Hotels and contains 511 rooms, including 49 suites. Guests can take advantage of preferential green fees at the Yalong Bay Golf Club, designed by Robert Trent Jones II and situated opposite the resort. Other facilities include a private beach and a spa, which is due to open in May. The Sheraton Sanya is also targeting corporate business in addition to holidaymakers, offering 11 meeting rooms and a ballroom that can accommodate 1,400 people.

General manager Claudio Nardini said the Sheraton Sanya is poised to become the leading five-star resort in mainland China. An increase in flights serving Hainan and the hosting of the Miss World show later this year are likely to give Hainan greater international recognition.

The Sheraton chain expects to open another property in Guangdong province in May. The Sheraton Dongguan Hotel will contain 411 rooms and four restaurants. Dongguan is located about 45 minutes from Guangzhou, 30 minutes from Shenzhen and 90 minutes by ferry from Hong Kong.

Big rise in visitor numbers

Visitor numbers during the spring festival holiday were up significantly on the same period last year, according to state media. China received a total of 59.47m tourists

from February 1-7, up 15.3 per cent from the previous year. Tourism income grew 13 per cent to Yn25.76bn.

The Hainan resort of Sanya recorded an increase of between 13 and 20 per cent in the first few days of the holiday period and its hotels enjoyed occupancy levels of at least 95 per cent. The number of overseas and domestic tourists visiting Shanghai between Saturday and Monday reached 1.3m, an increase of 10 per cent.

Other popular destinations included Yunnan, Guangxi, Heilongjiang, Jilin and Liaoning. Foreign travel also increased, said the China National Tourism Administration, especially to Vietnam, Thailand, South Korea and Australia.

Xinhua reported that 70 per cent of Guangzhou residents wanting to fly to overseas destinations now choose to fly from Guangzhou Baiyun International Airport. Previously, most would travel to Hong Kong to tour the city and then catch their flights.

CAAC welcomes Taiwan flights

The minister for the Civil Aviation Administration of China, Yang Yuanyuan, welcomed the commercial charter flights that operated over the Spring Festival between the mainland and Taiwan. Six Taiwanese airlines offered charter services during the holiday period. Despite being given late clearance to operate the services, they sold 1,293 tickets, or about 76 per cent of all seats available. However,Yang reaffirmed Beijing's position that there was no need for airlines to fly via a third point, such as Hong Kong or Macau.

Separately, Yang said that more international flights to China would be allowed this year, despite the fact that domestic airlines do not have sufficient capacity to operate all the additional quotas. He said the expansion would focus mainly on major cities in Europe and North America. However, some major cities in Africa and South America would also feature on the expanded list.

SIGN UP FOR THE NEWSLETTER

Email *

Yes, I would like to receive emails from China Economic Review. (You can unsubscribe anytime)

Constant Contact Use.

By submitting this form, you are consenting to receive marketing emails from: China Economic Review, Rm 1804, New Victory House, Sheung Wan, http://www.chinaeconomicreview.com. You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

About China Economic Review

China Economic Review (CER) has been a dependably independent voice on trends and developments in the greater Chinese economy for a quarter century. Our coverage has won recognition from the Society of Publishers in Asia and is widely read by economists, business leaders, academics and students with an interest in one of the world’s most vibrant and complex developing markets.